In its time-lapse response to the bottom falling out of the global oil market, the Nigerian government announced a series of measures, under the rubric of a new “austerity programme” (our last experience of this phrase was far from salutary), designed to tide the economy over the downside consequences of the much-reduced revenues attendant on frighteningly low(ering) global oil prices. A marginal cut in government spending and the planned imposition of wealth taxes were the headline-grabbing components of this programme.
However, the core austerity measure was tucked away in government’s new medium-term economic framework (MTEF) — for the two years to 2017. The numbers proposed in the MTEF for the existing price-support arrangement for petrol at the pump-gate indicate a halving of government’s spending on this budget line.
Forward back to the first week in January 2012. In response to a removal by government (on Sunday, January 1 that year) of the full subsidy on petrol, street protests were threatening to hobble domestic economic activity, and redraw the political landscape.
On government’s estimates, the subsidy then was the equivalent of N85 on every litre of fuel sold locally. In order, therefore, to plug this drain on the exchequer (estimated then at around N1tn, or about US$6.16bn), government moved the pump-station price of petrol from N65 per litre to N150 per litre. With the protests burgeoning and the toll on the economy growing, government eventuality shaved the subsidy by N32.5 on every litre. The pump-station price then moved to N97.5 per litre. By the beginning of the 2012 fiscal year, the implied subsidy remaining on petrol sold locally was N52.5 on every litre.
It is useful to remember that as at end December 2011, the Bonny Light blend of crude oil retailed for US$111.46 per barrel. The naira, on the other hand, closed 2011 exchanging for N158.27/US$1, N159.70/US$1, and N165/US$1 at the WDAS/RDAS, interbank, and bureaux de change windows respectively.
Back to the present; and, after a succession of price drops which started around July this year, our crude oil blend is retailing at a little under US$70 per barrel. Up until the latest ruckus in the global oil markets, much of the conversation around the level of the oil subsidy has revolved round how rising global market prices for crude oil mean that the subsidy is a moving target — growing (and burdening our fiscal space) as oil prices rise.
And falling as oil prices fall? This (admittedly new) question has not been raised as forcefully as the new operating conditions of our economy demand. Across the world, consumers have seen petrol prices drop in line with the fall in wholesale prices. The domestic petrol price, on the other hand, is stuck at N97.5 per litre.
One scenario, recently painted for me, has us delivering crude to refining operations in Ivory Coast, and obtaining refined products in return. As at June this year, the outbound leg of this transaction would have cost US$165 per barrel. On the back of the January 2012 oil subsidy accounting that would have implied a higher level of government subsidy.
But as the crude price dropped, this subsidy would have moved in the opposite direction. Such that once the crude price halved, all other things remaining the same, domestic consumers of petrol would have started paying more than the market rate.
Why would government not allow full pass through of lower crude oil prices to the price of petrol at the filling stations? The opaque nature of oil accounting in the country makes a useful answer to this question almost impossible. We still await the finance minister’s promise (this month) to account fully for the funds, which the immediate past governor of the central bank had indicated, may be missing from the national oil account.
It would seem that the presence of so many moving parts is not the only difficulty with the oil/petrol balance sheet. The recent volatility of some of these parts has been a far bigger worry. And none more so than the naira’s exchange rate. As against the N159.70/US$1 at which it exchanged (at the interbank market) last time we had an intense conversation around the level of petrol subsidy, the naira currently trades close to N190/US$1.
A higher exchange rate feeds into the landing cost for petrol. Assuming a retail price of US$78 per barrel for crude oil, calculations in the newspapers last week (using the Petroleum Products Pricing and Regulatory Agency — PPPRA — template), estimate the landing cost of petrol at about N101 per litre. Add to this the cost of getting it to the pumps, another N8 per litre, and the subsidy on petrol (above the current pump price) could be anywhere between N10 and N12 per litre.
Of course, crude oil prices have broken the US$70 per barrel barrier, and depending on whom you talk to, have further to fall. A more transparent process should see more of this fall feed into consumer pockets. However, if a worsening exchange rate is a let on the full pass through, then a more accountable process would let us know by how much.
Until then, it may be fair to imagine that given the rapid rate at which crude oil prices have fallen, by continuing to pay N97 per litre of petrol, the “average” Nigerian may now be subsidising the production and supply of this essential commodity.